Capital building


Published in the Dynamic Business Magazine,February 2008 by Cameron Bayley

When you think of the stock exchange, it’s easy to imagine investors anxiously awaiting returns on that ‘sure thing’ they heard about from a friend of a friend that was going to make them millions.

In reality, Cameron Bayley finds there are wise ways of approaching share investing, which don’t involve staking everything on a random tip and can provide a real way to build capital.

For small and medium businesses, building wealth to inject capital into their business is crucial to growth. 

While there are many capital-building options available, one solution worth considering is share investing. 

While it’s an option that will suit some more than others, and could form just one part of an investment portfolio, it doesn't have to be as daunting as the inexperienced might think.

One of the key benefits of owning shares is that they are very portable, according to Greg Tanzer, executive director of Consumer Protection at the Australian Securities and Investments Commission (ASIC). 

"They can be bought and sold quickly, and the brokerage [cost of buying and selling] on transactions is lower than for a property transaction."

Compared with property investments, shares are not only more liquid, their also less intensive. 

"It takes a lot of time and effort to find a property, research it, put your money in and obviously maintain and manage it," says Dale Gillham, chief analyst with private investment company Wealth Within. 

"And it tends be a bit more time-consuming for small business people."

With banks offering minimal interest on savings, they’re often not the best option. 

"At least with the share market, their dividend is more than what the banks pay you for a term deposit, plus you’ve got the ability to get capital gain out of that as well," Gillham explains. 

"It’s a better way to invest your money so it’s working hard for you."

Paul Heath, from financial services firm Goldman Sachs JB Were, says owning shares allows you to spread out your capital, which can alleviate the pressure small business owners have with all their cash going into one enterprise. 

"What the stock market does is, allow you to diversify your ownership. In its purist form, owning a share is owning a piece of a business."

Diversifying your wealth and earnings means you’re diversifying the risk of losing one or both away from a single business, he says, and it also provides the benefit of business ownership without any of the responsibility of running that business. (As one of his former clients once put it, "the NAB doesn’t call me in the middle of the night saying the alarm has gone off".) 

And share investing gives you the chance to broaden your horizons. 

"It allows you to diversify into a range of different businesses which are in your sector or outside your sector, and in most cases of a significantly different size to your own business."

Gillham says the best way to understand how the share market works is to look at it like an auction, where there are bidders, a seller, and an auctioneer facilitating. 

"The ASX is the auctioneer," he explains. "You might have 5,000 buyers wanting to buy shares and 5,000 people wanting to sell the same shares, and the ASX matches up the bids and the buyers and what the sellers want to sell for."

While selling shares at a profit is one way of making a return on your shares, the main way of receiving income through shares is via dividends. 

Dividends are payments made by a company to its shareholders, as a way of sharing any net profit made. 

There’s no fixed rule as to how much or when dividends get paid (according to the ASX website twice a year is the most common), and some companies may choose to reinvest their profits in the business and not pay dividends at all.

The share market

Shares can only be traded through a broker licensed by the ASX. 

Full service brokers can offer advice as well as trading for you, whereas a discount broker will just conduct the trading. 

There are also licensed websites where you can conduct your own trading. 

Many financial advisers (such as Goldman Sachs JB Were) are also brokers, and can provide advice on a range of investment options and conduct your trades. 

Heath suggests to those wanting to get involved in the share market, that it does take some preparation and it’s advisable to talk to an adviser or broker, especially to establish what level of involvement you want, and what sort of outcomes you are expecting. 

"Part of the discussion with an adviser should be, what are your goals, what’s your risk tolerance, how much time and expertise do you have to action this."

There are plenty of resources available for advice on how to get started. 

Two websites in particular should be top of the list for anyone interested in share trading. 

The FIDO page on ASIC’s website (www.asic.gov.au/fido) offers comprehensive information on the share market, with information on how to decide if share investing is suitable for you, and plenty of tips on how to wisely approach the share market and find an adviser. 

The ASX website (www.asx.com.au) features a ‘first time investor’ section, offering online classes covering all the basics, as well as information on how to find a broker and an online game where you can practice before trying the market for real. 

For further assistance, many TAFE institutions run courses on the basics of share trading and there are several books available.

While Gillham’s company offers the first government-accredited share trading course at Diploma level, he warns people to be wary of private courses out there promising fast and large returns, saying that if it sounds too good to be true, then it probably is. 

"If they’re promising a hell of a lot, chances are they’re not going to deliver. It’s very emotive marketing."

Anyone giving financial advice must be licensed by ASIC and this can be checked by calling ASIC on 1300 300 630, or visiting the website. 

"Steer clear of ‘all or nothing’ gambles, ‘get rich quick’ schemes and high-priced financial gurus with the ‘secrets of unbelievable wealth’. 

Most are a waste or outright frauds," warns Tanzer.

Peter Phillips runs a small injection moulding business supplying the medical industry, and has been investing in the share market for about three years. 

As a former real estate agent he was involved in the property market. 

"[But] now that’s pulled back substantially. I was always looking to get in the stock market for when I retired, and really just manage my own affairs." 

Proceeding cautiously, he enrolled in Gillham’s course, and says he’s only now scratching the surface of what’s involved. 

"It takes time to get a hold of what’s going on," he says. "You’ve got to have discipline. You’ve got to be prepared to do the work."

Heath says one of the biggest mistakes people make is investing in shares without doing enough research into the company. 

"Most people would never buy a house without really looking through it, looking at the contract, looking at the area, the prices in the area. 

The same applies to a business," he says. "But people will regularly take a tip on a share from a taxi driver." 

Phillips admits the lure of the ‘friendly tip’ has tripped him up: "We’ve all fallen for it. I’ve fallen for it. 

Every person you talk to who’s a trader has lost money in stupidity." 

If you are going to begin buying shares on your own, it’s best to get as much information about the company as possible, via annual reports, any published statements by the company, or documents on public record.

Gillham says another wise approach is to check the ASX 200, which ranks the top companies according to market capitalisation. 

Sticking to trading with companies in the top 50 on this list is a good way to minimise risk. 

"To a large extent they’re bullet-proof," says Gillham. 

Although there are rare exceptions, these shares generally go up over a period of time. 

"They pay reasonable dividends, and they’re not volatile enough to give you any heart attacks."

Another prudent way to minimise your risk is to diversify across investments. 

Putting your money into different types of shares is one way of making sure all your eggs are not in one basket. 

"I’m not going to think that every trade is going to be profitable because some trades move against you," says Phillips. 

"If I can do, say, seven out of my 10 trades profitably, I’m very happy."

Apart from specific risks to particular shares, another large risk associated with share trading is market risk, explains Heath. 

This is where global events (such as September 11) affect the whole market. 

"If the whole market goes down for global or economic reasons, or interest rate movements, that investment might not perform very well in a short period." 

The way to minimise this risk, he explains, is to spread your investment over other asset classes, such as property and savings.

"One of the biggest mistakes is, people don’t diversify. 

They don’t diversify across securities to mitigate specific risk, and they don’t diversify across asset classes to mitigate market risk."

Deciding which shares to purchase is one thing, but at the other end of the scale, selling shares can be just as difficult. 

And Gillham says people tend to be very hesitant to do this, even if a share is going down. 

"One of the most important statements you’ll read in any book is to cut your losses short and then let the profits run. 

So, by having little losses you can then put your money into something that’s going up." 

He recommends setting yourself a stop-loss mark (such as 15 percent) and if the share price falls to this mark, then sell. 

"What most people don’t do is, get out. If they get it wrong and the share goes down, they don’t get out." Phillips agrees: 

"When you say ‘trade’ that’s buying and selling. Some people just hate selling. If you’ve got a signal to sell, you’ve got to be absolutely prepared to sell."

While most people starting out tend to invest between $5,000 and $10,000, Gillham says you can begin with less than that. 

"In the early stages, if you don’t have a lot of money, put $1000 in. Just get started, learn the systems, learn how brokers work, learn a bit about yourself."

If you’re hesitant to get involved in the share market without being able to diversify into several shares, or different asset classes, Heath also recommends other solutions such as buying a managed fund, in which the fund manager will invest on your behalf over a range of different assets, including property, fixed income, and local and international shares.

Share investing doesn’t have to be about speculation (buying up shares with the intention to sell quickly for a profit), says Heath, and that’s where most people get burnt. 

"Most people would never buy a house with a view to selling it in three months for a gain," he says. 

"Whereas people buy shares and that’s what their expectation is." 

Viewing things with a longer timeframe allows you more control. "We encourage people to invest with the same time horizon that they would when they buy a house or a business."

Any investment will contain some risk, says Tanzer, adding that with the share market it’s just a case of implementing some safety checks and ground rules before you start so you can have some degree of control over any risk. 

"Just take it slow and steady," Gillham advises, and he’s a big advocate of being conservative. 

"You need to be careful and just buy the big, safe, solid shares, stick with them, and as you get more knowledge then you can be a bit more aggressive."

To learn the skills and knowledge to ensure your success in the share market click here.


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